Citi Says Hong Kong Banks Worth a Look

There’s no shortage of bears in Hong Kong these days, but are investors too down on the city’s big banks? Citi thinks so, saying Wednesday that average share prices for the group are down 7.5% over the past three months, far more than a roughly 2% decline for the struggling Hang Seng Index.

Bears on Hong Kong banks point to waning demand for property loans and tight competition. Citi counters this by saying potential upside is “insufficiently appreciated,” for example, the recent spike in the Shanghai Interbank Offered Rate, China’s version of the London interbank offered rate, or Libor.

“We acknowledge the volatile nature of SHIBOR; but if such an elevated level is here to stay, the positive impact on HK banks’ earnings could be substantial,” the firm writes in a note.

The impact would come primarily from a boost to the banks’ China balance sheets as yields on yuan-denominated assets rise and from growth in offshore loans to Chinese corporations. Loans for use outside Hong Kong logged “surprisingly strong growth” when China employed tightening measures in 2006-2007 and 2010-2011, Citi says, also noting that Hong Kong banks topped earnings expectations when Shibor spiked in the second half of 2011.

Citi’s top pick is Bank of China–which has a larger offshore yuan balance sheet than others–but the firm is also bullish on smaller Wing Hang Bank and Dah Sing Banking Group. Meanwhile, Citi says Bank of East Asia is less attractive, given its a greater sensitivity to slowing trade finance.